Over the past year markets have paid more attention to reflationary policies in Asia than earnings improvements. As a result, companies that have been growing the fastest—sometimes irrespective of valuations—have performed the best.
It is our belief, however, that if Asia's earnings continue to grow as we expect the market will broaden beyond some of these large capitalization names to reward companies irrespective of market size. In this environment, a total return approach focusing on income and growth can capture compelling opportunities.
While it is possible to find good income-generating companies in almost any sector in Asia, we see more opportunities in consumer-related businesses, as opposed to companies that are more export-oriented or cyclical in nature. In our portfolios, we tend to balance companies that grow their dividends with those that offer a stable dividend yield.
An allocation to small- and mid-cap stocks can help investors capitalize on Asia's domestic consumption story and the burgeoning middle class. The secular trend of rising disposable income is a structural tailwind for businesses and should propel their multiyear growth.
Dividend opportunities abound not only in countries where structural reform efforts and an increasing emphasis on shareholder returns support better corporate governance practices, such as China and South Korea, but also in those that are less in the limelight such as Vietnam, Indonesia, Thailand and Bangladesh.
Cyclical companies led the strong rally in 2017. More defensive businesses, such as telecoms and health care, lagged behind on a relative basis. In our view, cyclicals are not running out of steam as the overall valuations are still fairly well-anchored. Other sectors, such as IT businesses, might look frothy, but outside of that we can still find reasonably priced companies that we believe can deliver on earnings growth.
Since the latter half of 2016, our dividend strategies have been positioning toward dividend growth stocks. Even in the large-cap space, our focus has been on more cyclical sectors such as financials, consumer discretionary and industrials, while we pared back some exposure to telecoms, health care and consumer staples. In the current environment, we see better opportunities elsewhere.
To learn more about how we invest in Asia, visit global.matthewsasia.com/income
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